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jpn225/usdjpy

I've done some back testing and believe there is potential to create a profitable pairs trading system on JPN225/USDJPY.

Fundamental reasons why the Nikkei & the USDJPY are cointergrated likely have to do with Japan's export trade relationship with the United States and the fact the Yen is perceived as a safe haven (as opposed to stocks).

The two legs of the pairs trade are entered when the ratio (between the JPN225 CFD and the USDJPY) deviates away from the statistical mean based on historical data. The ratio indicator I'm using was made by hayseed.

I've also been looking at an indicator which can show the spread between JPN225 & USDJPY which can be found here.

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Overlaying Envelopes or Bands on the ratio or spread indicator can help identify when it has deviated away from it's moving average too quickly.
I find certain times of the day better than others, and being aware of economic calendar is obviously important, avoid certain days altogether.

Not the first time I've noticed the spread indicator curiously respect it's own resistance level..
Last couple of weeks has seen the spread indicator trending lower, against the longer term trend (going back to Jan 2016) which has been trending higher.

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With all the events happening, ECB monetary policy, Trump speech, his meeting with Putin tomorrow, North Korea tensions, NFP tommorow, FOMC minutes and member speeches,.. - I'll probably call it a week after this trade.
Like it how the ratio and spread indicator are both telling similar story.

It's only just come good this morning. Drawdown got fairly messy.. I need to find an effective way to manage drawdown better.
Trying to create a "market neutral" position trading 2 different asset classes is an issue.

Thinking of just trading one of the legs (ideally the laggard), because then I could use a stop loss.
I'm not sure, still working on it.

yeah, I used the average true range on the 30 minute chart based on the last 960 periods (about a month).
The 225's ATR is 25 points, the USDJPY's is 10.8 pips.
But the tick value on the USDJPY is ten times greater, so I used the ratio 1:4 (1 lot USDJPY for every 4 contracts of 225).

Apologies for the vast lateness of reply. I tried looking at few different things - long story short I gave up on it because I couldn't see the long term expectancy being profitable. Occasionally the correlation goes pear shaped and I couldn't figure out a way to limit losses effectively when this happened..